How you can earn more by paying less
by Dave Hodgson

Only one in three Canadians expecting to retire in 2030 is saving at levels required to meet basic household expenses in their retirement, and many may need to sharply increase their annual savings or continue working past age 65 to avoid financial hardship, according to a study sponsored by the Canadian Institute of Actuaries.

Yet despite this, a recent survey by RBC found that only one in 10 Canadians plans to make the maximum contribution to their RRSP this year.

How can you increase your retirement savings without increasing your contributions? One way is to decrease the fees that you pay to invest. Most investors are completely unaware of the amount of money being lost by paying higher fees for mutual funds than need be.

An actively managed mutual fund will have three basic categories of fees: management fees; sales fees; and special, or other fees.

Management fees are deducted from every investment dollar and are expressed as a percentage called a Management Expense Ratio or MER. The MER is required to cover the costs associated with administering the investment fund and are normally deducted regardless of how well the fund performs. Unfortunately, many investors believe the MER is the only expense that is charged to their funds.

Other costs that are commonly paid by investors are sales fees and commissions. These cover the compensation paid to the person who sold you the investment fund. When these costs are deducted from your initial investment dollar, it is known as a Front-End Load. If these costs are deducted at the time that an investor chooses to withdraw a portion of the funds associated with an investment, it is a Back-End Load.

To illustrate the significant role that your management fee plays in your retirement savings, consider this example: Let us assume that you have two RRSPs in the amount of $100,000 earning an annual rate of return of 8 per cent over 25 years. Both RRSPs are Canadian Equity mutual funds. Fund A charges only 1.25 per cent; Fund B charges 2.8 per cent. After 25 years, Fund A will have grown to $511,914 as compared to Fund B at only $355,135; a difference of more than $150,000. Which fund would you rather be in?

In the above illustrated chart, Fund B represents a typical mutual fund investment while Fund A represents a CBA Financial RRSP account.

Available exclusively to lawyers, their families and their support staff, the CBA Financial RRSP with Manulife Financial significantly reduces the cost of investing in an RRSP. Manulife Financial charges an Investment Management Fee or IMF. An IMF covers the cost of investment management and administrative expenses for a fund. CBAF funds do not have front-end sales charges, deferred sales charges, or special fees.

In addition, CBAF provides access to fund managers who are well known and respected for their long term stability and overall investment returns. New funds have recently been added, including funds that automatically adjust their level of risk to help maximize returns when you are younger, and then conserve your money as you get close to retirement. All of these benefits are available to individual investors or to law firms as a group plan.

For more information on CBA Financial RSPs, contact your local CBAF Authorized Representatives Dave Hodgson or Eric Mass at 604-247-8007 or dave@massco.ca and eric@massco.ca.

This article was published in the February 2008 issue of BarTalk. © 2008 The Canadian Bar Association. All rights reserved.